Behind the Glamorous Numbers: The Shadow of Armenia's Economic Growth

The shadow of Armenia’s economic growth

Armenia’s economy has found itself at a fateful crossroads today. The latest statistical data reveals a disturbing picture: the highly praised economic boom in the recent period was actually based on unstable foundations. When we study the facts in depth, it becomes clear that behind the glamorous numbers of economic growth lie serious structural problems.

GDP growth:

The unstable foundations of growth

The illusion of prosperity

The analysis of Armenia’s official economic growth indicators raises questions about the true state of the country’s economy. Hidden behind the official statistics are worrying trends that require rethinking the accepted notions about the country’s economic vitality.

Chart 1.

The first chart reflects the unstable course of Armenia’s economic development. Compared to the long-term average growth rate of 4.5%, significant fluctuations have been observed in recent years. It is noteworthy that the impressive 12.6% growth in 2022 was followed by a declining pace, reaching 8.3% in 2023, and only 5.9% in 2024. This downward trend is evidence of problems in the economy. Moreover, almost half of this growth was driven by the trade and financial services sectors, which in turn are heavily dependent on external factors, especially the inflow of Russian capital and Russian businesses.

The real picture of the growth illusion

Official statistics reveal an unstable picture of growth, suggesting underlying flaws in the Armenian economy:

1. The growth rates plummeted in 2024. In the fourth quarter, economic growth was only 3.7%, whereas in the first quarter it was 7.9%.
2. During the 2022-2024 period, growth rates consistently declined, falling from 12.6% (2022) to 8.3% (2023) and reaching 5.9% (2024).
3. The information technology sector, previously the pioneer of economic growth, recorded a significant decline in the fourth quarter of 2023 (-2.8%), and showed negligible growth in the second quarter of 2024 (4.5%).

These indicators are silent witnesses to the structural problems facing Armenia’s economy. The economy, which until recently showed seemingly dynamic growth, is now displaying signs of stagnation, especially in high value-added sectors.

Chart 2.

The second chart presents the components contributing to GDP growth in 2024. The analysis reveals an alarming picture: economic growth is highly disproportionate and mostly concentrated in the services sector. The main components driving the 5.9% growth are:

1. Trade (G): 2.1 percentage points,
2. Real estate activities (L): 1.6 percentage points,
3. Financial services (K): 1.3 percentage points,
4. Construction (F): 0.9 percentage points,
5. Information and communication (J): 0.6 percentage points. It is disturbing that manufacturing and high value-added sectors are not the driving forces of growth. Moreover, a number of crucial sectors had a negative impact on overall growth:
6. Public administration (O): -0.9 percentage points,
7. Mining (B): -0.2 percentage points,
8. FISIM (Financial Intermediation Services Indirectly Measured): -0.6 percentage points. Our analysis shows that the value added from gold re-exports played a decisive role in GDP growth. In our previous research, we noted that the gold re-export “industry” contributed about 4 percentage points, trade 3 percentage points, financial services 1.1 percentage points, while the rest of the economy combined recorded a -0.1% decline. As reflected in our previous analysis, this golden re-export activity accounts for about 61.4% of exports and acts as the main factor masking real economic decline.

The “Precious” Effect: The veil of gold re-export

At the core of this economic-statistical drama is the phenomenon of gold re-export, which gained momentum from November 2023 and continued until May 2024. This factor imparted an artificial vitality to Armenia’s growth figures. However, the facts show that this is of a transient nature and does not have solid foundations.

Economic sectors and their contribution

Overview of sector performance

Chart 3.

The third chart demonstrates significant differences in growth rates across various sectors, indicating that economic growth is not only unevenly distributed but also unsustainable. Key findings:

1. The IT sector (J), which was one of the leading drivers of growth in 2023, recording a 34.5% annual growth, has now found itself in difficulties. In 2024, it recorded an 11.9% growth.
2. The growth of other sectors has also slowed down.
3. Trade, which was the main driving force of economic growth in 2024, recorded a 16.8% growth in 2024, compared to a 23.5% economic growth in 2023.
4. Real estate transactions and the financial sector grew noticeably. Here, the significant contribution of real estate operations deserves special attention. It includes “Imputed rent for owner-occupied dwellings”, essentially evaluating the potential rent of all apartments in Armenia, regardless of whether they are owner-occupied or rented. This means that about one-third of the 5.9% growth is attributed to the increase in the market value of real estate, which cannot be considered a stable basis in the long term. And since there is currently a drop in apartment prices in the real estate market, it is possible that the growth of this sector will not have a long-term foundation and will not contribute to GDP growth at the same pace in 2025.

The sustainability of economic growth

Chart 4.

The 4th chart depicts GDP growth by quarter, where each quarter represents the growth compared to the same quarter of the previous year. What is worrying here is that the last quarter of 2024, compared to the last quarter of 2023, registered a growth of only 3.7%, compared to the annual figure of 5.9%. Across overall quarterly figures, the slowdown in economic growth is more visible.

Analysis of growth drivers

Chart 5.

Chart 5 shows the factors contributing to Armenia’s economic growth by quarter. Several significant observations are worth highlighting:

1. Long-term average growth: Armenia’s long-term average economic growth rate is around 4.5%. Any system tends to return to its long-term average unless there are qualitative changes in the given system that can ensure stable, long-term creation of value added.
2. Post-pandemic recovery: After the 2020 COVID-19 pandemic and the 44-day war, the economy showed signs of recovery. The main sectors of the economy provided about 4.5% of economic growth.
3. IT sector contribution: The IT sector (J) provided about 1-2.5 percentage points of growth, mainly due to the influx of IT specialists relocated from Russia. However, this sector has been experiencing a deep decline in the last three quarters.
4. Financial services and trade: Since early 2022, the main GDP increase has been provided by financial services (K) and trade (G). It should be noted that as a result of a large volume of capital inflow from Russia, the net profit of the banking system tripled in 2022 (Read more: 💸🔚🏦 Capital Outflow).
5. Overall, only the IT and banking sectors, driven by external impulses, provided almost half of the 12.6% growth in 2022.
6. The chart shows that from mid-2023, the IT sector, mining, public administration, as well as other services have not provided the same growth rate as in 2022.
7. There is a noticeable significant contribution from the real estate and banking system to recent economic growth.

Dependence on temporary and artificial factors

The data clearly indicates that Armenia’s economic growth has been largely driven by external factors:

1. In 2022, there was a significant capital inflow from Russia.
2. The large-scale re-export of gold starting from November 2023 artificially boosted growth figures (more: 🇷🇺💰🇦🇲 Armenia: a haven for Russian gold).
3. Growth is mainly provided by trade, real estate, and financial services, which are highly dependent on external factors (more: 🌅🏖🌄 Beyond the Border: Armenia’s Tourism Growth and Potential Decline).

These factors, although acting as short-term stimuli, cannot be considered guarantors of stable, long-term economic growth. Under such conditions, economic growth will inevitably tend towards its long-term average.

Fiscal implications

Problems related to the sustainability of economic growth have a direct impact on Armenia’s fiscal situation. Currently, there is a significant shortfall of about 8% in tax revenues. This gap leads to discussions of possible cuts in budget expenditures (Read more: 🧮⏳🎲 Armenia Taxes Time: Playing with Economic Growth).

Conclusion

The latest GDP data and sectoral analyses outline a worrying picture for Armenia’s economic future. The deep dependence of Armenia’s economy on external factors and the temporary stimuli derived from activities like gold re-export show that without substantial structural reforms, maintaining high growth rates will become impossible. Under current conditions, our long-term forecasts for GDP growth are not encouraging at this moment. Without a viable foundation for sustainable, long-term value-added growth, Armenia may continue chasing economic illusions instead of building real prosperity. The coming months and years will be decisive in determining whether the country can steer towards more sustainable economic strategies or will continue to rely on unsustainable and temporary growth factors.